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More storms on the horizon for BP

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Oil producers operating in the United States have a tough road ahead. U.S. officials are already demanding guarantees from all mining and extraction companies that there will be no repeat of the disastrous oil spill in the Gulf of Mexico.

Oil producers operating in the United States have a tough road ahead. U.S. officials are already demanding guarantees from all mining and extraction companies that there will be no repeat of the disastrous oil spill in the Gulf of Mexico.

BP, to its credit, has acknowledged that it is "absolutely responsible" for the clean-up, whatever the costs. As if to dispel any lingering doubt, President Barack Obama said unequivocally that "BP will be paying the bill" before meeting with company executives yesterday.

During the meeting, BP agreed to pay $20 billion in compensation to a special fund, which will be managed by Kenneth Feinberg, a prominent lawyer who previously managed the 9/11 fund established by Congress to provide assistance to the victims' families.

BP has been in and out of trouble for the past five years. In spring 2005, an explosion at a facility in Texas killed 15 and injured 170. Damages totaled $700 million. Thunder Horse, another BP oil well, was seriously damaged during Hurricane Dennis in the summer that same year. Fortunately, the accident did not result in a leak, but BP had to pay $100 million to repair the rig.

Those accidents seem insignificant compared with the Deepwater Horizon oil spill in the Gulf of Mexico. Obama described the spill as a "potentially unprecedented" environmental disaster for America. Some journalists and independent experts have called the spill "Big Oil's Chernobyl."

Could the Deepwater Horizon spill have the same disastrous consequences for the oil industry as Chernobyl had for the nuclear power industry?

Following the Chernobyl accident, many countries caught the "Chernobyl Syndrome" and either wound down or, at the very least, suspended their nuclear energy programs.

Environmentalists from the World Wildlife Fund are using the latest oil spill to renew their call to make the 21st century a renewable energy century. But any serious economist will tell you that this is all talk. The world has created a sprawling oil giant (or rather a hydrocarbon giant) consisting of a vast network of drill rigs, pipelines, refineries, tanker fleets and other facilities. This enormous and complex infrastructure cannot be easily abandoned or replaced.

All modern industries are designed to run on oil. This is the real reason alternative energy has been slow to catch on, not a lack of R&D.

The United States, the world's most technologically advanced nation, gets 85% of its power from hydrocarbons, and it will continue for another 30 to 50 years - for as long as there is enough oil, analysts maintain. Until the world runs out of oil, no accident - no matter how large - will force the beneficiaries of an oil-based economy to abandon their profits.

Proof of this is provided by the market response to the Deepwater Horizon spill. In the first few weeks after the spill, speculators pushed oil prices up, causing the OPEC basket to go up by $0.23 to $84.36 per barrel. Light Sweet futures rose $0.04 to $86.19. However, oil prices have recently stabilized at $72 per barrel (Brent).

The spill could potentially disrupt the balance of power among major international energy producers. It has certainly put President Obama's energy agenda in jeopardy. The U.S. government had planned to resume the construction of nuclear power plants, boost shale gas production and lift the 20-year ban on offshore drilling, which was put in place out of environmental concerns.

The country's offshore reserves are estimated at 1.6 trillion cubic meters of natural gas and 14.5 billion barrels of oil. Obama proposed tapping these resources as part of a strategy to reduce the country's dependence on imported oil. This certainly came as bad news for oil and gas exporters, as the United States consumes almost a quarter of the oil produced in the world.

However, in response to the spill, Obama reinstated the moratorium on offshore development until producers are able to guarantee its safety. No one knows when this might happen.

Although Russia will certainly benefit from this moratorium, it may see its own plans interrupted. The World Wildlife Fund recently called on Arctic countries to halt offshore drilling in the region until all risks have been addressed. According to environmental experts, there is no effective technology for cleaning up a spill in ice-covered waters. The slow progress in the Gulf of Mexico makes it clear that cleaning up a spill of this scale is an enormous challenge, even without the added complication of ice. The world's top engineers and scientists led by U.S. Secretary of Energy and Nobel laureate Stephen Chu are working on the spill in the Gulf of Mexico. They have all the latest technology and equipment at their disposal, and still they have failed repeatedly to stop the leak.

Incidentally, Russia's most promising oil projects involve offshore drilling in the Arctic. There is no doubt that foreign rivals will use all the political levers available to pressure Russian producers to heed the WWF's call for an Arctic-wide moratorium.

From an economic standpoint, BP will likely be the main victim of the accident. Hours after the explosion, some media sources were reporting that the accident was orchestrated by BP rivals intent on a hostile takeover.

This conspiracy theory should not be taken seriously, of course. However, there appears to be nothing but storms on BP's horizon. Putting aside the loss of a $350 million drill rig, the company's market value plummeted by roughly a third between April and June, from $180 billion down to $115 billion. In addition, it will have to pay $20 billion in compensation for the damage done by the accident.

No one knows how long it will take to plug the leak and clean up the spill. President Obama said the effort could take months and perhaps even years. So there may be some truth in the gloomy joke that Britain's largest oil producer will go the way of Russia's largest oil producer, Yukos. Rating agencies are certainly pessimistic about BP's future: Fitch recently downgraded BP from AA to BBB.

 

The opinions expressed in this article are the author's and do not necessarily represent those of RIA Novosti.

MOSCOW. (Vlad Grinkevich, RIA Novosti economics commentator) 

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